CFA Level I · CFA Level I Exam · Introduction to Risk Management
A portfolio manager holds a thinly traded corporate bond. She finds that selling a large position would require accepting a price well below its recent quoted value. Which risk is she most likely facing?
She is most likely facing liquidity risk. The bond trades thinly, so selling a large position forces a price concession below the quoted value. Settlement risk involves failure to deliver at settlement, and model risk arises from errors in valuation or risk models.
- ASettlement risk
- BLiquidity riskCorrect
- CModel risk
Explanation
Liquidity risk is the risk of losing value because an asset cannot be sold quickly without a price concession, which is wide bid-ask spreads or market impact. Settlement risk concerns one party failing to deliver, and model risk concerns flawed valuation models.
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